Economic views and news - Thursday, 24 November

ANZ Research

Thursday 24th November 2011

OUTLOOK

CURRENCY: USD strength in the lead into their Thanksgiving celebrations off the back of risk concerns is likely to continue. Illiquid markets and the approaching NZ general election will keep the NZD down for the count.

RATES: Likely to be unchanged. Despite global turmoil, the 2yr swap has actually been paid overnight. Did they have their screens turned off?

REVIEW

CURRENCY: The Chinese HSBC PMI release yesterday was enough to drop the NZD through key support at 0.7437. It failed to recover significantly overnight and remains close to recent lows in early morning trading.

GLOBAL MARKETS: It was another iinteresting day on European markets, and US S&P 500 is down for the 6th straight day. Things got off to a bad start, with markets weighed down after yesterday’s poor Chinese PMI figures.

The Dexia rescue plan remains in the news, and today there is talk that if the French need to help Belgium support the bank, it may be the last straw for France’s credit rating.

Things only got worse from there – first it was the failed German bond auction, and then came the Bank of England minutes with calls for more easing.

US data was also a tad weak, but of course, the main focus was on bond yields, and they pretty well all rose in Europe. Needless to say, there was nothing but red ink across Northern Hemisphere bourses. Things are looking nastier by the day.

KEY THEMES AND VIEWS

GERMAN BOND AUCTION SHOCKER. We have gotten used to shocker bond auction results out of Europe, but today’s German auction really caught the market on the back foot. Indeed, Germany tried to sell €6bn of 10 year bonds, but only received €3.9bn of bids. The Bundesbank filled the gap, as it customarily does, but this was the biggest shortfall since 1995.

In the current environment, the market now finds itself asking, if Germany can’t get bonds away, what hope does anyone else have – especially the EFSF? Well, quite. Whatever your bent, this is certainly an unwelcome development. It could be a one-off, but it could of course be symptomatic of the stresses that are out there. And these stresses will reach NZ before long (and in fact are arguably already here).

We have been running with the premise that NZ will be one of the countries that escapes relatively unscathed from the ongoing sovereign debt crisis on account of its low sovereign debt levels (even if this is countered somewhat by high household debt). But when we start to see core countries like Germany run into liquidity problems, that’s a very strong sign that what we are witnessing is systemic, and not just concern about one or two borrowers (or countries).

OTHER EVENTS AND QUOTES
• Minutes from the Bank of England’s November meeting showed unanimous 9-0 vote. But it was this comment that got the market revving: “Some members noted that the balance of risks to inflation in the November Inflation Report projections meant that a further expansion of the asset purchase programme might well become warranted in due course”. So, we may see more QE from the BOE.
• Yemeni President Saleh has agreed to stand down, after signing a power transfer agreement. He is the 4th Arab leader to succumb to popular uprisings, going the way of leaders of Libya, Tunisia and Egypt.

NZDUSD: Breaking down…
The US holiday weekend is likely to deliver increased volatility for the NZD as markets become more illiquid with the approaching NZ general election. Risk aversion is unlikely to drop significantly as the result of the election becomes increasing difficult to forecast. Expect further downside moves for the NZD as exporters remain patient.
Expected range: 0.7321 – 0.7437

NZDAUD: Against the odds…
Concerns on the Chinese economic front have managed to impact the AUD more than the NZD at this stage. Factors on the NZD front should however ensure further gains remain difficult to sustain at this point.
Expected range: 0.7613 – 0.7683

NZDEUR: Rising tides…
A “failure” of the German 10 year auction overnight means contagion from the current crisis has hit at the core of Europe. The EUR has weakened relative to the NZD and ensured that support at 0.5510 remains in place.
Expected range: 0.5525 – 0.5575

NZDJPY: All one sided…
All the work on this cross remains the domain of the NZD. With a slightly weaker JPY the BoJ is unlikely to intervene to stem further tests of support. The low 57JPY region remains key to the medium term outlook.
Expected range: 56.80 – 57.80

NZDGBP: Bouncing…
A marginal bounce off support at 0.4754 at this point holds little weight. The UK remains subject to the European contagion and only time will tell if this cross can stem the recent fall.
Expected range: 0.4754 – 0.4799

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